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tv   Book TV  CSPAN  July 19, 2009 7:00am-8:00am EDT

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long shot but the story of lincoln, darwin and modern life and that is my lead-in and that i carry -- i carry books about lincoln and fdr, which i take on each trip and forget to read but i will do it this summer! ers. >> john talbot described by as the oracle of the financial world exposes what he says are the biggest myths about the current recession, wall street's role in it, and how to get out of it. barnes & noble in new york, hosted this event. it's an hour. ers. >> thank you all for coming. it is a rainy night out there. i found out the hard way.
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i'm going to give you some -- short opening remarks and leave plenty of time for questions. i'd like to thank the folks for c-span for being here today and filming us. i just returned from an economics conference in italy. one of the sessions was a mock trial in which the economists of the world were put on trial, accused of completely missing the warning signs of the current crisis. not predicting it, doing nothing to prevent it, and thus far, doing little to help enact smart reforms to end it. i had to give a talk on my book, at the same time as the mocks trial across town in italy. but i didn't want to miss it so i sent roberto per rehabilitate, the chief -- pereti, the chief prosecutor of the trial and himself a top economist the following memo. it was entitled witness for the
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prosecution and it read as follows: roberto. i see you are speaking at noon today as the prosecutor, asking whether economists are to blame for the current financial crisis. i wanted to attend but i am speaking at the same time across town on my knew back. i wish you success with your prosecution, and although i generally am against the death penalty, i think i would make an exception in this case. your prosecution reminds me of a story i heard about john mckay, the first coach of the tampa bay buccaneers, who unfortunately went zero wins and 16 losses in their first season of pro football. in the locker room after the last game, coach mckay was asked by a journalist, what he thought about the execution of his team on the field, and mckay said he was all in favor of it! [laughter]ers. >> i did have one question, roberto, i wish you would ask during your prosecution, could
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you ask whether the defense believes professors of finance, economics, option theory and derivatives were conflicted in writing and discussions about the potential for a crisis, given the same professors were earning hundreds of thousands of dollars from our biggest banks and hedge funds in the form of speaking engagement fees, hon rarms, expert witness fees in tries and consulting in business partnerships, with some of the worst offenders on wall street? today, i want to address the real causes of this crisis. because, if we don't get that right, there is little chance obama's suggested reforms will be effective, in either ending the crisis, or preventing something like this from occurring in the future. and to those of you who believe the crisis is over, i have some
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swamp land in florida i would like to sell you. first, i would like to caution you against believing those with very simple, easy to understand explanations. this crisis is very complicated, and unfortunately some of our brightest are saying some of the stupidest stuff about what caused the mess. you have alan greenspan and other defenders of completely unregulated markets suggesting that such a downturn is normal. that it is part of a normal business cycle. that it was completely unavoidable. argument that it was almost like an act of god as random and unpredictable and natural as a hundred-year flood to use alan greenspan's language. there is nothing normal about what the world is experiencing today. to suggest otherwise, smacks of a "let them eat keiko" elitism that shows that alan greenspan is far removed from the actual pain and suffering the crisis is
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causing the average american family, similarly be suspicious of those who try to blame capitalism generally for this crisis, capitalism has done more to create growth and reduce poverty and inequality in the world than any economic system in the history of the world. let's be careful not to throw out our baby, capitalism, with the bath water. global capitalism knows no country borders and recognizes no national boundaries so it is not surprising that it has helped -- is it working? it is not surprising that it has helped the poorest of the world in china and india and asia, the most in escaping posted even if it meant greater hardship to the middle class in u.s. and europe. but if you look past nationality what is wrong with helping the poorest of the world first?
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finally, always hold last as an explanation of a situation you don't completely understand, and -- an accusation those who participated in or caused the crisis were somehow irrational or even stupid. i worked with these folks on wall street for ten years, and i can promise you there are many things but they are not stupid. similarly, to blame the crisis on wall street by calling wall streeters greedy, to me seems to miss the point. greed is what wall street does. and has always done. there is no wall street without greed. why else would someone watch his life disappear, as he watched a 19 inch computer screen only to grab a morsel or crumb of profit and try to get rich off of it? greed has been in our genes for hundreds of thousands of years. the genes have not mutated suddenly in the last 30 years to make us more greedy.
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and to those behavioral economists out there, who are quick to accuse others of irrational behavior i think of no greater public pronouncement of your own inability to identify the true causes of the problem than trying to label all of those around you as irrational. it is a very dangerous game you are playing. because, it lace the seeds of an argument that says what we need is greater protection from our irrational selves. and, who is always there to offer this service? an elite class of bureaucrats who pretend to know more about what makes me happy than i know myself. if behaviorists are ever able to prove that markets or most of their participants are irrational it will be a very sad day for those of us who love and hold dear our individual freedom, our void individual choice, and our basic rights as humans. if the key participants in the current financial crisis were
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irrational, please help me identify who it was that was irrational? who are we talking about? was it the homebuyers real estate agent, who was earning 20 to $50,000 commissions with no risk, but only if his or her client was this winning buyer? do you see why it was in their interest to get their buyers to width more, mott less and certainly unethical and unprofessional bull not irrational from their perspective. with a vast number -- were the vast money number of financial middle been irrational, the appraisers to the rating agencies who were paid billions of dollars to cull junk securities aaa, to the congressmen who took bribes to loosen industry regulation, to the investment bankers who were paid hundreds of billions to pedal the stuff, to the mortgage brokers who falsified mortgage applications, to guarantee approval, again, highly unethical, and undindz some
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cases completely criminal but not irrational. what about the homebuyer himself, certainly he was irrational to pay 50 to 60% premiums more than a home's true worth. but, what if i toiled you that most of these homebuyers were playing with other people's money? that they had borrowed all of the money they needed at 2-3 percent with no down payment of their own funds. certainly, a terrible way to arrive at the fair price for a home, but, such a buyer would be motivated to buy the biggest home he could, as he would want to maximize his up side profit, in a booming market and he would be insensitive to price as he knew he'd enjoy the upside but if the market turned south he could avoid any loss by allowing the bank to take the property back in foreclosure. sounds rational to me. if he borrower is getting such ay sweet deal, the lender, the commercial banker was acting irrationally in giving him the
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loan. but the world of commercial banking has changed dramatically the last 25 years. banks today don't sit on most loans, they make. they secure ties them and sell them upstream, to big principal investors. like pec's funds, sovereign governments, municipalities and insurance companies. the commercial banker has few rational reasons to care about the quality of the loan he created. if it defaults, he won't lose anything. we now know some of these banks did indeed position some of the toxic waste on their own balance sheets, and, their losses turned out to be huge. large enough to bankrupt many of these firms. sounds pretty stupid, doesn't it? but, what if i told you these same banks were making tens, if not hundreds of billions of dollars in profit from their mortgage operations, and their bank managers had seen their bonuses increase, from less than
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a million dollars a year, to something, sometimes more than $50 million per year. now, it doesn't sound so crazy or stupid, does it? so, at the end of this unethical, fraudulent, most likely criminal food chain, stands the principal investor, the pension fund or insurance company that got stuck holding this worthless paper. certainly, he or she has to be stupid or irrational to have made such a poor investment. actually, no. while many of these institutional-type investors are not the sharpest knives in the drawer, they did do what modern finance theory told them to do. they diversified their holdings, but they did it so well, that they held so many different investments, spread all over the world, that they couldn't possibly find time to properly evaluate them, or analyze their value, and, certainly did not have time to supervise the
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individual managers of each of the underlying companies, and assets they held. in addition, their most trusted advisors were telling them that these were safe investments. and all three of the rating agencies were giving these investments their highest rating, aaa. now to call the victim of such a fraudulent attempted to deceive irrational would be like calling the victim of a home burglary or car theft irrational. we may not like or approve of such behavior but out doesn't make the victim irrational or necessarily stupid. so, maybe there are real reasons why this crisis occurred, that have not as yet been discovered. and that if found will prevent us from throwing out our beloved baby, capitalism or calling those involved, either stupid or irrational. maybe there is something about the banking industry itself that makes it different from other industries. and makes it ill-suited for the type of competitive capitalism,
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that seems to create long-term sustainable values in other industries, in which competition is encouraged and allowed to foster. bank deposit insurance guarantees were instituted in the 1930s to stop runs on banks during the great depression. but, they may have created the very moral hazard that is causing today's financial crisis. quite a rorng, isn't it? banks today can dramatically increase their leverage, shifts into riskier assets such as derivatives and businesses like investment banking and they won't lose depositors, and they won't even see the cost of their debt funding increase, because of the guaranteed -- guarantee provided by the federal government to the depositors. in the 3s 193 so, when depositor insurance was introduced, everyone understood banks would therefore have to be aggressively regulated by the government since the market no
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longer could. unfortunately, over time, this lesson was lost or forgotten. the banks over the last 30 years had used their increased lobbying and political strength to undo and eliminate most of the original legislation, meant to effectively regulate them. in 1999 they got glass-steagall removed so they could get into the investment banking business. in 2000, they were successful in assuring that the derivatives business would remain unregulated. in 2004, they lobbied successfully to remove restrictions on how high their leverage might go. and as we have seen, their leverage over the last 30 years, has increased from about 8-1 to something like 30 or 40-1. over the years, banks have used their size, power, and political muscle to rewrite the rules of the game to benefit themselves. but at the same time, threaten the entire financial system with
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collapse. did i mention that these same all-powerful banks also own and control the federal reserve system, and its board, the group that is supposed to be regulating them? these banks are so large as to be, quote, too big to fail, close quote. which violates the first premise of capitalism that badly performing businesses must be allowed to fail. because of their heavy involvement in the credit default swap markets, these banks are also too interconnected to fail. the credit default swap market makes everybody important and too big to fail because of its huge, complex network of default guarantees. it also violates the precept that markets must allow failures for creative destruction to occur, and because of this, the credit default swap market needs to be shut down immediately. banks as we have said are also
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highly leveraged. that it becomes when you are so highly leveraged, rational for their management teams an shareholders to begin to act like option holders, birdie en -- worried only about the upside rather than equity investors who must also be concerned with downside snare joes and the risk of insolvency, i believe if we made one change and limited leverage of the banks in the world to just 8-1:we would eliminate the major cause of most booms and manias and thus avoid almost all future busts, recessions, crises and depressions. we have new leadership in washington, of course and they were elected on a promise and platform dedicated to change. radicals like me will never be happy with the pace of change, especially as innocent families suffer, as a result of this crisis. if it were me, i would attack the biggest problem first.
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the corrosive impact that money and lobbyists and corporate power has in our nation's capitol. but i would most likely fail. the powers that be, congressional incumbents of both parties, big banks, and big corporations, and their lobbyists, and the corporate-owned, sponsored and controlled media, would swat me away like the annoying pest, authors and true investigative journalists can be. but, barack obama has a different approach. his years of community organizing experience tell him that to accomplish real, meaningful change, especially against an entrenched and powerful opponent, you take small steps first and move gradually, you move incrementally. nothing builds a group's confidence like success. you can build a new powerful majority of revolved citizens by winning small batless first, before taking on the big battle
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against the machine. against the system. then, once you have real power, and there is no power greater than a people united, then and only then, do you accomplish real reform and bring real change to a corrupt system. thanks so much for listening, i would like to open the floor for questions, and, please, remember, there is no much thing as a stupid question, especially given how complex this all is, and if any of you listening would like to get involved in trying to figure out how to organize ordinary americans to clean up their government, and throw the corporate lobbyists out of washington, please contact me at my e-mail address, i have some ideas but would like to hear yours and we'll open the floor up to questions now.
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>> good eveningers. >> i don't think it is working. yes, he says it issers. >> i'll talk louder. because this is not workingers. >> is it? okay. i'm sorry, my question is really twofold and completely disparate. one is, obviously you think glass-steagall should be reinstated, number one and number 2:what is your concern about inflation in light of all of the deficits that we are incurring? thank you. ers. >> yeah, i absolutely think glass-steagall ought to be reinstituted, something evening stronger because the world changed in 70 year, we have to have a prohibition against banks getting in to risky businesses and it makes no sense for you to deposit your money in a bank, expecting that you can get it back, and find out, the managers of that bank have gone and bet it on derivatives and investment banking and hedge funds-type
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activities. and so, absolutely, something even stronger than glass-steagall needs to be reinstituted. the second half of the question is a very good question. i am a big supporter of the theory that you can't spend $4 trillion and guarantee some $13 trillion of assets, and not have significant, significant government costs going forward. if the government has significant costs going forward, it is not clear where they'll get the money, by their own projections they are showing $2 trillion deficits each year, and that forecast allows for 4% growth from 2011 and on and i don't see how we'll get back on that growth record, so, we're going to -- just to fund the basic rations of the country we'll be putting out $2 trillion a year, of new debt borrowings, and, then we have all of these guarantees that might come back to haunt us and looks to me like -- and the banks haven't finished with all of their losses yet, so it looks to me,
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clear the government will have to come up with a lot of money, it is not crazy to think they'll print some of that rather than borrow it and if they turn though printing presses we'll have inflation. warren buffett said, when treasuries were yielding 2%, it was the next mania or boom, that it was crazy tor for the countries of the world to the lending the u.s. government ten-year money at 2% and now the rate jumped considerably. so -- and i think it will jump considerably more and what it tells you as an investor is be careful, if a bond salesman tries to move you out of the stock market and into corporate -- long corporate bonds or long treasuries, they have real price risk to them if inflation comes back. ers. >> i think it can be easily argued that the margin -- majority of the populous of our nation don't even slightly understand the complexity of economic situations, wall street, what have you.
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and that the way the media presents it, it just ends up scaring more and more people into believing whatever is the scariest scenario, so how do you propose going forward we handle the media's effect on the population's view on the economy and how do you propose, i guess, at least educating the majority of the people on a basic level of understanding of where their money goes and what happens to it? ers. >> you know, we are not so different than other countries of the world right now, unfortunately the countries we are most similar to are the developing poor countries of the world, we have become origin tina instead of argentina becoming more like us and there are 100 advanced countries of the world and 50 poor countries of the world and what almost all 50 countries that are poor share in common is a dictator or somebody, military, who controls their legislature so it is hard for the people to write reform
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legislation and he controls the media and i don't mean to suggest there is a dictator in the u.s. that controls both of those, but, there is a broad class of the very wealthy, and the most powerful corporations, who do a very good job controlling those entities and they don't do it as if they meet late at night with their secret commissions, they don't have to. they have the same motivation, it is to make profit, and, so, when you turn on any cable news or network news program, other than pbs, it is corporate sponsored. they can't say anti-corporate messages because the corporations are funding their entire program. and, they are corporate owned, and they are -- their corporations they're biggest lobbyists in washington, not necessarily on the finance front but clearly all the issues important to them as media companies, with regard to media concentration in the market and whether they have to pay for free air time, et cetera, et cetera, so it is a very difficult battled. if you think of the corporations in america being very strong and
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government being very strong and i think, almost equal third leg of that tough triangle is the media, again, very powerful, and the individual sort of is stuck in the middle of the triangle, how do we get out? you know, we can have endless elections, on and on and on in which republicans take the side of big business, and democrats take the side of big government, and nothing changes. so, we have to break out of this triangle, and the good news is we have the methodology to do it and that i believe this is internet and the internet so far has not been take ever over by corporations though they've tried three different times and it allows for individuals to communicate with each other and organize and the question you have to ask yourself, is why haven't individuals organized to date. they've had lots of opportunities, and i used to think they were stupid, i used to think they didn't understand the issues and used to think the media fooled them and i no longer believe that. i have traveled the country, my
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family is from kentucky, i talk to people all over the country, and my good friend in kentucky has you a tenth grade education, and he can explain this better to you than i just did. they know thigh are getting ripped off, big business is ripping them off and credit card companies are ripping them off and know h banks and this government is ripping them off and i think they are at the stage of asking themselves, what can we do, how do we organize, and that is what i would like to get at next. ers. >> another question here. ers. >> john, you mentioned in your book, 86 biggest lies on wall street and i'm curious for you, out of the 68 biggest lies, which one is this biggest and why do you think so? ers. >> it is funny, because you try to anticipate questions you will get when you do things like this and give talks and i unfortunately never anticipated that question and it's not the way i wrote the book. i didn't write the book with number one lie being the worst or most offensive, the way i
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wrote the book was the first two chapters try to explain the current crisis an lies that got us into the crisis and the second chapter tries to identify lies preventing us from getting out of the crisis and then, i take you a much bigger, broader view of of general lies on wall street that prevent us from doing what we want to do which is invest and make money and i look at stock investing lies and bond investing lies and lies about alternative investments, so i don't have any one favorite. i will taupe you about lie number 21 because i think it is a big one and that is diversification has been held up by modern finance theory and all of wall street, as the reason why -- and how you ought to invest, how assets are valued, how risk is valued, and it is this foundation of the capital asset pricing model. the foundation of all modern finance and i think it is wrong. i think it is wrong. i don't think you end up saving money by diversifying. and i'll tell you why. a german pension fund who tries to diversify in germany ends
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upholding three or 5% of his assets in california mortgages. he's never been to california. he's never read the mortgage. after the crash he tried to find the mortgage to read it and nobody has it. the investment bank doesn't have it. nobody knows where it is filed. the judge threw out his lien case and he says you don't have a lien if you can't find the security and so what happens was, this german pension fund thought he could hold 3% of 33 different assets around the world and be protected, and these assets were much more correlated than he thought they were and he didn't know whether he paid a fair price for any of them because he never had time to do the analysis. he depended on middlemen, who, themselves were conflicted, to decide the prices paid and finally, if you wonder why, maybe, american and businesses and other businesses around the world are not so tightly managed as you would hope they would be, it is because their shareholders are just like this german pension
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fund manager. they each have hundreds of investments around the world and don't have the time to monitor any of them. so the theory of diversification sets up beautifully for middlemen to come in and tell this ignorant pension fund manager what is best for him, except they don't. they say what is best for themselves and their own cash flow and it turns quickly into a very corrupt system. ers. >> ers. >> the stock market is down 30, 40% and 300% declines, a lot of bonds are -- people came up with the subprime mortgages, obviously, if you have a mortgage with 3% backing and 4% backing and you have a slighted change in the value of the prompt you are on -- underwater
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quickly and the first question is do you think the market reached a level that the asset values are attractive and why? ers. >> it's a funny time to be giving the talk, it is this middle of a recovery and it is a funny recovery and citibank stock went to 57 -- from 57 to 1 and now is up to 2-3 and the last three months the stock markets rallied some, 25% from the lows, right? and are still off 40% from their highs, right? but but i don't believe it is sustainable and i'll tell you why. there were something like $60 trillion of wealth out there in the world, between homes and office buildings and the stock market values of companies. and, that decreased to 30 trillion dollars over the last three years. there was about 65 trillion of debt just in the u.s., and that
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has not declined hardly at all. the banks have written off about a trillion, i'm sure there has been other write-offs we don't know about and what you have, is this an unsustainable world, the as sets, true value, market value dropped by half and yet you have a huge debt overhang and how does the debt overhang get taken care of, either banks have to continue to write down and take further enormous losses which is very bad for the banking system which is very bad for the economy, or, people have to struggle and with much less income and much higher unemployment and much lower asset values, continue to pay that debt off. and, that debt overhang will cripple them, for years to come. on the housing side, it is true that the housing is adjusted just about the percentages i predicted in a book i wrote in 2006, called "sell now, the end of the housing bubble." and predicted santa barbara and -- san franciscos and the los
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angeless would come down 30 to 50% and the country as a whole would come down some 25% and there are towns in california that are now off, 55, 60%, so there is a chance that certain towns, now, are starting to reach a bottom. but, not all of them are. and the reason is, is that these banks used to lend about 7 to 9 to 10 times the combined income of both spouses to buy a home. they realize now that was a mistake and they are going back to lending 3.5 to 4.5 times your combined income and unless you want to put up a very substantial down payment it is hard for that bank credit evaporation to support the types of housing price weiss have seen. and, it is funny, the poor neighborhoods, in each of these cities or the middle class neighborhoods that are ones that adjust the quickest because they had the most foreclosures. middle income people don't have other assets to sell, they don't have other income when this bank comes calling to foreclosure their mortgage. but the wealthier areas, the
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areas along the coast of san francisco, of san diego and l.a., they have adjusted somewhat, maybe 20% declines but have not seen their full decline yet because they haven't had the foreclosure wave yet but it doesn't mean they won't adjust. they had the largest appreciation, the wealthiest neighborhoods had the biggest percentage increases, they saw 500% appreciation over the last 15 years, and they, too, will adjust downward and the way the adjustment will work is you will walk out of your million dollar home in la joya and look down the street at five similar homes with for-sale signs and one will tell you he sold for 500,000 and you will not keep paying your million dollar mortgage, i don't care what interest rate they charge you if you know your home is worth $500,000. ers. >> i'm a commercial real estate broker and everything you said was spot on, especially appraisals, if they didn't like it they ran and got one that
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suited them, the banks however lended and lent on a thing interesting, called projected income. the income was never there. but, you could come in and say, i'll buy this and a year from now, it will be sold nor much more and what happened, as you see in new york with the biggest develop,it did not materialize. and, but most people did run after it and the other thing is the concept of short selling. i know some people who are short-sellers, who feel they have gotten a very bad rap for what is going on today and the whole thing is just very confusing, are they to blame for any of this mess or is it part of market forcesers. >> no, no, i don't believe so. short-sellers, were the only ones that were right and saw the market was overvalued and sold short a stock and made money and you can't accuse somebody of ill play for that. e no, the reason why people get the idea that these commercial bankers and real estate players were ig nornlts or stupid, is because -- as all of us know,
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when -- if you go to an individual, and don't ask him to verify his income, don't ask to verify his job and done make a phone call to his employer, if you don't even ask him to fill out an application, you know who that is going to attract as a klein base, right? and all of us know that this person is likely to default. so, we must immediately concluded, my god, this person who extended on these terms must be an idiot but what you are not seeing is what he did with the piece of paper when he length his signature to the bottom of the mortgage noted and he didn't hold it and immediately sold it and who was crazy enough to buy it. they created an instrument called cdo, clarmized debt obligations, in which they put a whole bunch of the worthless paper in a pool and got the rating agencies convinced that if the worst offenders and biggest defaulteders went to the lowest tranch first of the pool the upper tranch, bake 65, 75% of the junk paper would be rated
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aaa. so, you know, it is a question of mathematics and you have to ask yourself, questions of how bad the world can get and what the defaulted rate is going to be but let me tell you this, people that were pushing this paper and taking out these enormous fees, i know what their worst-case scenario was, they ran -- the risk analysis guys ran a worst-case scenario on the products and the worst-case scenario they could imagine is what if real estate only increased 5% a year for the next 40 years and not one of them -- and i have a friend who in investigated of of the biggest banks, not one asked the question, what if real estate prices declined at all, 1% and never asked the question, what if they declined 30 or 50% and that is a very very, important question to ask when dealing with mortgages, because when a house price is going up, and somebody has a medical emergency or a loss of a job and they have to defaulted on their mortgage, they don't. because, the home price increase every year has created equity, in the prompt.
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so, what they do, rather than putting the home back to the bank is go sell the house, take there profits and pay off the noted. but now imagine that same person, has a job loss in a declining real estate environment. now, he's under water. now, he has no incentive to sell the house in the private market, because he'll just be working for bank because all the proceeds go to the bank and he will not claim any equity and what does he do, what is rational, he mails the keys into the bank and says, thanks, has been nice renting from you for the last two years. ers. >> i wanted to ask a follow-up on the german example that you used on the question. ers. >> yes. ers. >> does that -- are you -- i'm sure are not -- does that mean global investments are a doomed venture -- global investments does that mean they are not a good idea on the whole? ers. >> globalization has been pushed on us as a great idea and again you have to examine it to see what are the shortcomings of it, right? one of the clear shortcomings which nobody analyzed in
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advance, was, for -- whatever value is created from increased trade, there was going to be a huge cost to the working poor and the middle class of advanced countries who were going to be put in competition for jobs with indians and low wage chinese, low wage south americans and mexicans. and, so, i don't care how hard you worked in america, people in these countries were going to work for a dollar or less per hour and it was going to hurt your lifestyle so inning a gather the total weather of the u.s. might have increased over the last 30 years but i can assure you the lower 50% of our americans declined and this is one problem with globalization, and the other problem with globalization we are seeing now, which is when there are these unanticipated crises we don't predict and which are highly correlated across a lot of different as upset classes and countries, they hit everything. they hit every country and can't be contained and it is as if a virus broke out in africa, and rather than containing it to a
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small village and treating it, because of globalization and widespread use of air fares, it very quickly spreads around the world, look at the most recent mexican virus, you can see it started in mexico and within two days it was in almost every country of the world. so, globalization is dangerous in the regard: if our economists don't understand economics perfectly, if our politicians don't know how to plan the future perfectly and if there is always uncertain and risk we are no longer exposing it just to one stated, city or country, we expose it to the global economy and that is very, very dangerous. ers. >> a few questions. number one, with the debt overhang issue, isn't the only possible solution to inflate, create inflation in order to decrease the real value of the
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debt? ers. >> that is the conclusion i came, to and how disturbing to read in the paper today that ben bernanke went to congress and promised them the one thing he'd never do is inflate the currency and is reading out of a play book that is 30 years old and we know inflation is harmful to an economy and found that out during the carter years but the one time inflation might do some good is when everybody has too much debt. corporations, businesses, governments, municipalities, individuals, everybody is too leveraged and it is almost fair to go ahead and inflate and not back those debts. you can argue the holders of those debts would be upset, but they bought too much debt. they never should have invested in that debt and that debt probably should be trading at 70 or 80 cents on the dollar. the other way to get rid of some of the debt and it ought to be happening and is not, is these companies that are -- and banks that are getting in trouble, we ought to be restructuring them
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and fannie mae and freddie mac over the weekend basically went bankrupt without claiming it, and basically came out of bankruptcy on monday morning without ever going in, and their creditors got paid 100 cents on the dollar. well, the creditors, $1.6 trillion dollars of creditors, 500 billion, held in china. got paid off whole, how did they get paid off whole? the u.s. government taxpayer came in and gave them $400 billion and the clock is still ticking and eventually we could end up paying them a trillion dollars but it makes no sense to me and all of these bailout, the wall street bailouts and auto bailouts, et cetera as long as they are happening and not punishing certainly the shareholders but also, the debt investors and writing checks from the taxpayer it is not fair, not fair. ers. >> that is actually my second question. ers. >> i read the -- why the bondholders were protect and the
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banks, what is your reason for that and why did that happen. ers. >> in a complex world it is an easy answer, because they lobbied your government and they lobbied your government when they had market valuations of 100 to 200 billion dollars and for a while, there, when citibank stock was at 1-2 dollars they had market capitalizations south of $10 billion and i would have thought it would have taken some of their muscle away but they were not stupid, of their small market capitalization and money they took back on the efforts they didn't discontinue lobbying and continued to lobby in washington and is a simple explanation for why they are get awaying with this. ers. >> it seems like there are so many other lobbies. why would bondholders -- holders of bonds in banks be special as opposed to holders of bonds in any other type of corp prashgs aren't the bonds held by the mutual funds and the pensions. ers. >> there are lots of lobbyists in washington, but, as far as i
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can see none are having any problems right now. i mean, they killed the global warming initiative. they have set back any sort of public alternative discussion for health care. they basically emasculated the credit card reform, had a vote in the senate of 70-25 to put a cap of 15% on credit cards, because the credit card companies are charging 33%. so, you know, it is hard to imagine there being enough hours in the day for the congressmen to meet with lobbyists and i lived in washington when i was 6 and 9 years old and it was a small town, i mean, it was a small town, and less than 300,000 people and now, the greater maryland northern va, washington area is 4 million people and the two wealthiest suburbs in america are both suburbs of washington, d.c. and there is no industry there. they don't make anything. the only people there, supporting themselves are lobbyists. and, it has become a very, very big business. so... it is the answer to all of this. i could also write a book about the pharmaceutical industry, the
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hospital industry, the health care problems, you would have the same final chapter, all about lobbyists and getting control of the lobbyists. yes? sners. >> ers. >> thank you, do you feel obama will have any success against the three headed con ter of corporations, health care and lobbyists and do you feel the clinton administration went up against them at all, and was part of the scandals involved in the administration an effort by the -- using an old word, military industrial complex to, you know, quash that type of activity? ers. >> you went hear it often because most people are democratic or republican and i happen to be independent and people on the liberal side as i am are slow to say anything negative about the democrats but there is one democrat i have to mention and that is bill
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clinton, bill clinton was a very capable, very smart man, he tried to accomplish good, but sh, what he was most interested in was raising money for campaign commercials and he was smart and knew what is the way you get elected and as a result of figuring this out he sold the democratic party to big corporations, because, back then, they were 90% of them -- the money contributed to a campaign and the republican party was already controlled by big corporate money and so the world after 1992, became republican versus democratic corporate money. and if you think, since then, there really has not been any real debate between the parties, they falsely crate debate on issues some people care a great deal about but they are not important to the world economy or the u.s. economy and aren't important to our livelihood or
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welfare on a daily basis, and in -- and these big corporations, it allows them to basically steal money from you, the average wage in america has been flat to down in real terms for about 20 years, and union membership in america has gone from 35% to 9% and i've already discussed the great majority of americans have been asked to be put in competition with not only low wage worker around the world but most from a communist nation that prohibits labor unions and if you mention the word labor union at your daily job in communist china they will take you out back and shoot you and that is not an exaggeration and we have changed whatever moral balance we had between money and the people, that we developed from the 1930s and the eisenhower years, changed radically towards the corporation, and, now, we need to take it back. whether obama will be successful, he has not indicated that he will to date. so, our only hope is that he is being stealth, that he is
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building momentum, that he is trying to build a coalition of all of the people, because, it is going to take all of the people to accomplish this, and we hope in another year, in his second term, at some point, he then turns and puts the pressure on. it would fit his modus operandi, this is exactly how you community organize, you organize the people first, before you take on the big issues. and, so, i'm hopeful that that is what his plan is. he certainly is much smarter than i am, so i know he has a plan. >> we will take two more questions. >> good evening i'm not sure, if you will be able to answer this question, but, obama passed a law recently, not sure if he passed, or will pass it. effective february, 2010, and will make it hard for young people to get credit cards, and i'm kind of confused, for the young people like myself who are responsible with little credit they do have how do we -- they expect us to establish credit
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cards, once this bill is passed, effective 2010 for the ones that are responsible for their credit and it is confusing i wonder, do you have any suggestions or, like, what is going on with that? i don't understand, really, like... >> i have not read the bill and i don't know all of the details. i can tell you the problem he was trying to address, the problem he was trying to address is the credit card companies had been invited onto our campuses around the world, around the country, and the reason they were invited onto the campuses is because they made big donation to the universities. and the universities ended up putting their university emblem on the credit card, and letting them set up outside of the bookstore, and, giving credit cards to these student. well, again, you might think bankers are stupid, right, when i tell you, that they were giving three and $5,000 credit lines to students, who by definition had no jobs, no income and no means of repayment, be careful, bankers aren't stupid. what they did is let this student, not only charge the 5,000, they let them continue to
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charge, 7, 9, $10,000, some of these student had better stereos than i ever saw in my college days, right? and then graduation day came and the student wrote and said, i don't really have any money and i don't know why you gave me the credit card, offa job or income and the credit card company wrote back and said, that is okay. our next letter isn't to you, it is to your apparently and they wrote to the parent, saying, look, your son is -- or daughter has run up $10,000 of credit, and if they don't pay us back, we will destroy their credit for the next 8 years and oh, did i tell you, credit rating is this first thing an employer looks at during an interviewer. and, so i think it was just a massive game, massive fraud, and that is what obama is trying to shut down and i bet he probably didn't go far enough and i wouldn't worry, if i were you, i'm sure the credit card companies will protect you and allow you to get credit.
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>> i wonder if maybe it is a bit unfair to put so much blame on lobbyists when at the end of the day they are not the ones casting any votes. >> well, okay. that is a fair question. i mean, when i -- i first identified the problem, 15 years ago, if you go back and look at my six or seven prior books, regardless of the titled, i always have a chapter about lobbying, it seems into influence everything, either that or i'm obsessive about it, i don't know which, but, until about two years ago, i focused my attention on cleaning up government. i thought government was the problem for hag taken this money. and, then i realized and thought it through, something my sister would team me, where is the power? follow the money, it is not these congressmen. these congressmen and senators seem powerful to you, they are inconsequential compared to the money behind the lobbyists, behind these corporations. and, so, if you are going to change washington, you can try to accomplish it through the volt but i believe you will be unsuccessful. i believe the not only if you run for office, thinking you
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will clean up your congressional district, will you run into and in come bent with 10 to $15 million of money, to run campaign ads, some strikingly against you, some you wouldn't recognize yourself when they get through with you. and if you run for senate, they have 25 to $30 million. but, in addition to that, did i tell you they gerrymander and reorganize their entire congressional district, so they -- the congressional district is all republicans now and who allowed that, the democrat across town who redrew his district so it is all democrat and the re-election is inevitable and so, i don't think there is any beating incumbents fairly and i don't think our vote means anything now and i'm going up stream, upstream and following the money and i'm going after the corporations and the question is, how can we get corporations to see it is in their interest to get out of the lobbying business and quit giving money to our government. >> john, take one more... >> one more question? >> one more question.
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>> what about asian liquidity? underpriced asian currencies relative to the u.s. dollar? could any of this have been possible if the liquidity from asia had not been available? for it to be put to use in the u.s. and europe? >> well, this is one of the great warning signs that economists missed, right? i mean, for ten, 15 years, we had this great inflow of money from china into the u.s. where was it coming from? the average chinese was making $1200 a year, and saving 40% of it. this average american was making $45,000 a year, and had negative savings. didn't save a dollar. now, this is the first time in the history of the world that i know where the poorest country on earth was lending 40% of its
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income to the richest country on earth and that should have set off alarms, right? and, the story that nobody would tell, in the the media, because they are sponsor-supported, is that it is clear the americans were on a consumption binge. and they were buying anything that moved, because that you western spending their money. so, the chinese were making this product, cheaply. i mean, a lot of the products you go into wal-mart and buy today, would cost ten times as much if not for the chinese, but you not only bought the products, you bought a lot of the product because you bought it with their money and they've gave you this financing and the low cost product, who could avoid that deal. so, i think it is a huge, huge warning signal, and i'm not sure it was causal but it was clearly indicative of the status seeking consumption binge the u.s. and europe were on over the last 15 years. >> it looks like we have taken a big standard of living hit in this country, and it is continuing here.
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we have roughly one million college graduates a year, how are these young guys, college graduates, going to be absorbed into the economy, and what can the federal government and corporations do to help the major problem? >> it is a big, big problem. i mean, i wish i were 30 years younger, if you remember, back in the 1960s they said don't trust anybody over 30. well, i'm a little -- nottite 60 yet, but i'm way over 30, and i don't know if i can lead the revolt of the young people, but they need to get in the streets. because, when you look at what we have done to them on every front, i mean, we have caused the collapse of this financial system, by ignoring its warnings, we have not repaired it add qualitied, because we have allowed unfettered access to our congress, we have borrowed 13 trillion from these young people, to guarantee our problems, and we have spent 4 trillion of their money, we are running $2 trillion deficits which they'll have to pay, and
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in addition, social security is 30 -- $25 trillion in deficit, and, medicare is $72 trillion in deficit. again, we are passing the cost of thee care of our elderly not to us, but to our children and grandchildren. so, you know, we know why they get stuck with these things because they are too young to vote, right? bought even now for the first time they've come out in big support of barack obama. and they have registered to vote in big numbers. but they still aren't in the streets and still have not been part of this discussion, as to what to do with this collapse. i mean, it doesn't make any sense to me, that we would spend 15 trillion dollars of our children's money, so that our style of lig and status level doesn't have to decline 2 or 3%, right? we've said sit is at unsustainable levels because it is supported by phony debt and lending from the chinese, and i would love to be 29 again and trustworthy because i think i would lead that revolution.
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thank you so much for coming. [applause]. >> john tall to the bot is a former visiting scholar at the anderson school of management and a former investment banker for goldman sachs. he's the author of 7 books, on economics and politics, including, "the coming crash in the housing market," published in 2003, for more information on the 86 biggest lies on wall street, visit, >> here's a look at some of the upcoming book fairs and festivals over the next few months: the newberry library has holdings of rare and unique printed work and later this month host the 25th annual book fair in chicago. and the california literary arts society brings readers writers and book sellers to the beach. for the ventura book festival. and this september in george
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ayou can go to the decatur book festival. celebrate local culture and literary history in st. have youingstein at the florida heritage book festival. >> let us know about book fairs and festivals in your area and we'll add them to our list. e-mail us at >> this summer book tv is asking, what are you reading? >> i just finished recently a pretty big book, called "liberal
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fascism" and had to read a lot of stuff for that, and stuff i will confess i have been reading most have been graphic novels, essentially, comic books for grown-ups. but, i am right now reading a book called "rebirth of a nation" by jackson lears, i think that is the title, i hope it. >> guest: it is pretty good so far and ideologically i have some problems with it but it is a good read about the sort of intellectual currents that lead to the progressive era, in effect and i have been reading stuff by the academic -- social scientists, sherry burnham about social democracy which is pretty good, and i picked up a copy of a book called "methland" because i think meth is aye an interesting social phenomenon, not a good recreational drug, though and that is ral about it. in terms of books i would recommend this people, vin
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cannato has a book out, about em lis island, gloriously reviewed and i am hoping to get to and one of my favorite books, an older history books, written by an lbj liberal, eric goldman and it is called "rendezvous with destiny" fantastic, easily accessible book. and another book, arthur e. -- eckert. called "the decline and fall of american liberalism" i hope i'm getting the titles right i think smoked a lot of pot before i came on here... what else, my own book, "liberal fascism", great beach read! win friends and influence people. and, the angel graphic novel series which takes place after the tv series ends, a good read if you are a follower of it and i reread "the watchmen" recently, the famous graphic novel from the 1980s, an interesting cultural, historical
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document and i think is a good comic book but is more interesting how it reflects on the times. and i guess that's about it for now. oh, and very much looking forward to chris caldwell's new book, about europe and immigration. which people on the right in particular, fans of his have been waiting for, for a very, very, very long time and he's a fantastic writer and so it should be pretty good. :


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